UK, EU, and US Politics. A bit of football (when it's not too painful). Some culture. All stir-fried with a dash of Tabasco.

Tuesday, 25 November 2008

June 2009 election now a remote possibility

The one clear consequence of yesterday's Chancellor's Statement is that the possibility of a June 2009 election has receded massively. Essentially, the wrangle over yesterday's fiscal package will only be resolved by its ultimate impact on the economy. In the short term, watch what happens to sterling. In the longer term, will the economy follow the growth path forecast by the Chancellor? Should it do so then the Government will be able to make a strong case that its intervention was effective.

Unless the economy rapidly and unexpectedly out-performs the Chancellor's forecast, this means that it will not be until the end of 2009/ beginning of 2010 that we can make that assessment. It is difficult to foresee an election in 2009 on that basis.

Will it work? There's not an economist in the land who can make that prediction. Astrologers are likely to be as useful in making that forecast. A fiscal stimulus is the right thing to do in this situation with the banking system as weak as it is. That does not mean it will work however as we are in incredibly uncertain economic times. It is little over two months, yes TWO MONTHS, since Lehman Brothers went to the wall. It is notable that President-elect Obama's economic team is willing to be even more aggressive than our Chancellor should it be necessary. It is worth holding that thought.

As for the Tories, they are on completely the wrong side of the economic argument. They have got themselves into the preposterous situation of arguing that a fiscal contraction in the early 1980s was the cause of the economic recovery in the 1980s. It is half right. Monetary stimulus did work. The recovery was made far more painful by a masochistic fiscal contraction and that left a lasting scar on the nation; one that is still felt today.

It may not matter that they are wrong in political terms. If this stimulus package is not seen to have worked they may reap a political dividend anyway. In terms of their ability to make the right decisions in office it doesn't create much confidence at all.